The year 2020 anno domini is just around the corner. Unfortunately for those of us who aren’t clairvoyant, foresight is not 20/20, but knowing the current state of various major asset classes and economic indicators helps aid how we invest in the months and years ahead.
Equities - 2019 was that strongest year for stocks in a decade, up almost 29% YTD, thanks to the December 2017 tax cuts, buybacks, and interest rate cuts by various central banks around the world in hopes of continuing the current economic expansion and staving off slow-growth fears. In a note to clients, RBC Wealth Management stated “Corporate earnings will increase, as will dividends and buybacks, pushing share prices higher.” Although growth isn’t anticipated to be as strong as it was in 2019, stocks are still expected to outperform other asset classes, particularly those of UK companies as the fears surrounding Brexit begin to dissipate. Broader European stocks as well as those from emerging markets also present upside opportunities to investors. The looming cloud overhanging equities is the fact that this has been the longest economic expansion in over 70 years, and with it has come a growing sentiment that the party may end sooner rather than later. Enter alternative asset classes.
Yield Curve - Earlier this year the US yield curve (the difference between short-term and long-term interest rates) inverted for two weeks, sounding off alarms in the investment community of an impending recession. The Federal Reserve responded with interest rate cuts, which bolstered growth and confidence in the economy, as indicated by a now-normalized yield curve, currently at its steepest level since October 2018. The Fed has messaged it expects no further tweaks unless it sees inflation pick up, at which point interest rate will be considered and implemented, putting a damper growth in equities
Energy - The significant drivers of the energy market next year will be non-Opec oil production, Chinese oil imports, and the influence of politics around climate change. The boom in US oil continues thanks to shale rock production. New production is expected to come online from Brazil, Norway, and Guyana, and if non-Opec production surpasses 1 million barrels per day, then the market will be oversupplied, leading to a fall in energy prices. China’s demand of 11 million barrels per day in 2019 has provided price support, but slowdown fears caused by trade disputes may lead to further price erosion in this sector. Ultimately, In the short term, prices will be determined by supply and demand forces, but a potential Democratic victory in the 2020 US presidential election may bring with it additional efforts to transition away from hydrocarbons towards “greener” forms of energy.
Real Estate - Many sellers will choose to “wait out” the first half of 2020, reducing available supplies for buyers, particularly millennials looking to take advantage of low interest rates. This, in addition to constrained inventories, may result in price increases for sellers later in the year, as demand overshoots supplies. The equation will “become more balanced as new and existing homes hit the market and price growth will moderate to 3%.”
I advocate a sober, cautiously optimistic approach to the new year regarding portfolio positioning given the above economic indicators. Have a balance of exposure to equities and bonds (stay away from junk bonds even though they currently appear to offer attractive yields) as well as emerging markets stocks and precious metal ETFs, as they also present upside opportunity.
Happy Holidays, and have a Happy New Year.